Gyros and Mofongo

Fixed Income Market Strategy

Highlights

Gyros (Greece) and Mofongo (Puerto Rico). Though decades in the making, these two longstanding risks dominate the near-term outlook. Greece captures most of the broad market's attention but Puerto Rico will be important to U.S. retail investors. For each there are similarities and differences but on the similarities they finally appear willing to confront the long-standing debt sustainability issues with the possibility of default.

The Five Stages of Greece. We have repeatedly used this theme to describe the events in Greece over the past several years. Drawn from the Kubler-Ross model of the emotional response to catastrophic loss, the five stages are not experienced in order but rather one moves back and forth through denial, anger, bargaining and depression before finally arriving at acceptance. The most recent negotiations between Greece and its creditors saw again the attempt at moving back into denial as Greece sought the previously rejected approach of relying on tax increases to plug its deficits, while its creditors held to their demands to cut spending. Having been misled by their government that they could both renegotiate the bailout and stay in the monetary union, the Greek people will vote on July 5th in what might become a new independence day for Greece (at least from the currency) should they vote ‘no.’

"The debt is not payable." Puerto Rico's governor, Alejandro Garcia Padilla, made this—for some startling but for us long overdue—admission in a televised broadcast June 29th. That exits the "denial" phase for Puerto Rico as "Puerto Rico does not today have the capacity to continue paying under the actual terms." Though bond prices plummeted back in 2013, the scope of debt restructuring suggested across the more-than-$70 billion debt outstanding represents a significant event for investor exposure and its potential to set precedents.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

The opinions expressed are those of BlackRock as of March 6, 2015, and may change as subsequent conditions vary. Information and opinions are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable. The information contained in this report is not necessarily all-inclusive and is not guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. Reliance upon information in this report is at the sole discretion of the reader.